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Bob certainly is correct with respect to how fair value should be
calculated:
interest at the "risk-free" rate calculated on the current cash index (SPX)
for the number of days remaining to expiration, minus the estimated S&P
dividends (expressed in index points) expected to be paid from the current
date till contract expiration.
Bloomberg apparently uses, as their "risk-free rate", some combination of
the 90-day T-Bill and Eurodollar rates; for the dividend figure, they use
an actual estimate of the dividends expected over the time period.
What I said about the two Web sites still stands, however: their value is
significantly different from that published by Bloomberg, and I cannot come
even close to their value using any reasonable interest rate and dividend
figure. (Their value of 10.38 implies an interest rate of 7.45%.)
Regards,
Carroll
----- Original Message -----
From: "Bob Fulks" <bfulks@xxxxxxxxxxxx>
To: "Carroll Slemaker" <cslemaker1@xxxxxxxx>
Cc: "David J. Slavik" <djstrade@xxxxxxxxxxxxxx>; "Philip Nixon (24-7)"
<pnixon@xxxxxxxxxxxxxxxx>; "Omega-list" <omega-list@xxxxxxxxxx>
Sent: Wednesday, August 02, 2000 3:15 PM
Subject: Re: S&P fair value
> Fair Value is equal to the value of the S&P 500 Index, plus interest
> until the contract expiration, minus the dividends you would have
> gotten on the S&P 500 stocks. Premium is the difference between the
> Fair Value and the Index. The TV usually reports the premium and
> calls it the Fair Value.
>
> The interest term is pretty consistent but the dividend term can
> vary. Most people just prorate the average dividends over time while
> others may figure the actual timing of the dividends in their
> calculations. The latter is obviously more accurate if you are
> looking for arbitrage opportunities.
>
> If you are comparing the Fair Value with the Index at the close of
> the day you get an additional variable. Since the stock market closes
> at 4:00 PM and the futures market closes at 4:15 PM (Eastern time), a
> lot can happen in those 15 minutes. This introduces a third term. And
> remember that the official closing price is not the value of the last
> tick, making things even more difficult.
>
> Bob Fulks
>
>
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